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One Big Win for Airbus Might Actually Be a Loss

At the Paris Air Show last week, Airbus took home the grand prize in terms of customer commitments, having sold airplanes worth tens of billions of dollars over the course of the week. Boeing (NYSE: BA) also had a fairly good week, with orders from the likes of Air Lease (NYSE: AL) and United Continental (NYSE: UAL) , but had to settle for the second spot in terms of total deal value.

Yet one big Airbus order -- United Continental's decision to upgrade its 25 Airbus A350-900 orders to the larger A350-1000 model, while also adding 10 more firm orders -- actually may have been a loss for Airbus. While United dumped its A350-900 orders last week, it placed 20 orders for Boeing's similarly sized 787-10, a new stretched version of the Dreamliner.

Boeing's new Dreamliner: the 787-10 (courtesy of Boeing)

Investors may see this as a win-win situation for Boeing and Airbus; at the end of the week, both had 10 more orders from United than before the show. Yet Boeing is now poised to dominate the high-volume segments of the widebody market at United, while Airbus is confined to the lower-volume "large widebody" market segment. This probably means that Boeing will get the vast majority of future widebody orders from United.

Market segmentationOf all the major U.S. airlines, United has been the most aggressive in updating its widebody fleet. After last week's 787-10 order, United is now slated to receive 65 Dreamliners, of which six are already in service. Furthermore, the company's A350 order book now stands at 35 planes.

United has been very clear with investors that the company is investing in its fleet in order to replace older, less-efficient aircraft, not to grow. This means that Boeing and Airbus are fighting for a finite number of orders with United.

Initially, Boeing and Airbus were attacking different segments of the widebody market. The larger of the initial two Dreamliner variants (the 787-9) is comparable in size to the smallest A350 (the A350-800), but that is the only overlap. However, Boeing's new 787-10 is similar in size to the A350-900, which is by far the best-selling version of the A350.

Reading the tea leavesIt is therefore not a coincidence that shortly after United agreed to order 20 787-10 airplanes, the company switched its Airbus order from the similarly sized A350-900 to the larger A350-1000. The A350-1000 will primarily replace United's 23 Boeing 747 jumbo jets. Meanwhile, United has already begun replacing its older 767s with the smaller versions of the Dreamliner. United's new 787-10 orders suggest that the company intends to use that plane to replace its fleet of 74 Boeing 777s. (United's 777s are similar in size to the 787-10.)

As of the end of 2012, United operated 158 widebodies, of which 135 were within the size range of the three Dreamliner models; only the Boeing 747s are larger. While Airbus has locked in 35 A350 orders from United, Boeing is likely to corner the vast majority of United's fleet replacement orders. After all, once United introduces the 787-10 as a Boeing 777 replacement, it will be hard to justify ordering similarly sized A350-900s; it would add unnecessary complexity to operate two different aircraft types that are the same size.

Stealing a marchWhile Airbus gained 10 A350 orders from United last week, this wasn't really a win for the company. Boeing's timely decision to stretch the Dreamliner has positioned it to win almost all of United's widebody replacement business over the next 10-15 years. By contrast, Airbus will primarily provide replacements for the largest jets in United's fleet: a lower-volume segment.

United is just one airline, albeit a big one with 158 widebodies as of late 2012. However, if other airlines -- especially those that have already ordered smaller versions of the Dreamliner -- also decide that the 787-10 meets their needs, Airbus could lose a lot of business that it would otherwise have won with the A350-900.

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Companies are a little hesitant to get on board with Boeing until all of the issues are worked out. However Boeing is in a strong position because of the better fuel economy of it's composite plane.

Airbus made a mistake thinking that every customer would want a huge plane. The fact is the plane is too large for most of the airports so it's roll is long distance flights. They are not the bulk of flights.

That leaves Airbus trying to compete with it's older 350 design against Boeing's state of the art 787 design.

Boeing has some issues they need to workout concerning the 787 before total confidence is restored in that department, and that is for the 787-8. Airbus will undoubtedly have their issues as well with the new A350. The 787-9 prototype should be taking to the air in the very near future, so the 787-9 and the A350 will be prototypes in the same time frame which will be really good because airlines will be able to analyze the raw data from both to see if they both live up to expectations. The 787-10 is further down the line.

United is attempting to get it´s finances in order still after the merger. Them deferring and opting for the A350-10 and the 787-10 is a clear indication of them not wanting to commit at the moment to anything that would be sooner than they can afford. Anytime an airline makes a move like this, it´s mostly the bean counters behind it. This also means that what these aircraft were supposed to be replacing in the fleet will remain in the fleet a bit longer. That means the 747-400´s will more than likely remain in fleet a bit longer until the arrival of the A350-10 and a few other aircraft that were intended to replace the 747-400´s.

@AngelTread: I don't think U.S. airlines are really patriotic in their purchases. Boeing may have slightly more market share in the U.S. than outside of it, but if anything that's because it's offering better pricing to keep its U.S. customers. For example, American Airlines gave more than half of its recent narrow-body order to Airbus; US Airways operates the largest Airbus fleet in the world, JetBlue and Spirit use all-foreign airplanes, etc. At this point in time, I think money is the one and only factor driving airlines' aircraft purchase decisions. Maybe it was a little different "back in the day".

@kirozila: Obviously Boeing and Airbus have huge backlogs for these planes. But I don't see why you think they can't fulfill orders on time (unless you're counting the initial delays that pushed back the entry-into-service dates). By next year, Boeing will be building 120 Dreamliners per year, meaning that it could burn through the current backlog by the end of 2020. Yet Delta doesn't even begin taking its 18 orders until 2020, and there are plenty of other orders that extend past that date. Also, there's no reason to think Boeing won't tweak the production rate up again if orders continue to rise.

To your first point: I agree that 10 planes is not a huge difference for Boeing or Airbus in the grand scheme of things. But United has a fleet of 74 Boeing 777s (which are the same size as the 787-10 and A350-900), most of which were delivered between 1995 and 2002. That means the bulk of them will be ripe for replacement between 2020 and 2030 (approximately). If Boeing wins the vast majority of that replacement business, as now seems likely, that actually would be significant. If other airlines follow a similar calculus, the effect will be even more pronounced.

@Tyeward: I agree that United probably wanted to push back some aircraft deliveries, given recent FCF struggles. I'm not sure whether adding 10 aircraft to the Boeing and Airbus orders was a form of "compensation" from United to the manufacturers for changing the delivery schedule.

I'm sure Boeing and Airbus won't have any trouble filling the open delivery slots in 2016 and 2017!

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Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry! Follow @AdamLLW